Komercní banka, a.s. (KOMB) Earnings Call Transcript & Summary

Good morning, good afternoon, ladies and gentlemen. Let me welcome you to the presentation of the results of Komercni banka for the First Quarter of 2023. Today, it is the 12th of May 2023. Please note that this call is being recorded. Our speakers today will be Jan Juchelka, Chairman of the Board and CEO of Komercni banka; Jiri Sperl, Chief Financial Officer; and Didier Colin, Chief Risk Officer. We also have with us today, Margus Simson, Chief Digitalization Officer; Jitka Haubova, Chief Operating Officer; Miroslav Hirsl, Head of Retail Banking; and David Formanek, Head of Corporate and Investment Banking. So you will have opportunity to direct your questions to them as well later. As usual, we will begin with the presentation of results, which will be then followed by a questions-and-answers session. [Operator Instructions] And I would like to hand over to the CEO, Jan Juchelka. Thank you.

Hello. Let me also welcome you on behalf of the management team of Komercni banka on the occasion of presentation of consolidated results of Komercni banka Group for the first quarter of 2023. Before jumping on the concrete pages of the presentation, just let me say that the first quarter as for everyone in this industry was pretty interesting framed by a certain level of uncertainty, which was stemming from the various collapses of regional banks in the United States and the story of Credit Suisse. I need to say that Czech market remained pretty immune vis-a-vis those events, even though one should take into account the [indiscernible] which was, let's say, framed by various gossips and reactions of clients, which did not materialize in any substantial situation on the market. So Czech banking market remained very strong also for the first quarter. And I will be happy together with my colleagues to lead you through our presentation and give you also a bit of flavor of how important it was for us from the perspective of implementation of our strategic plan. Welcome again, and we go to the pages. So the Group net income totaled at the level of CZK 3.6 billion, which is by 1.4% higher than the first quarter of 2022. ROE, I'm happy to say that we continue delivering double-digit currently at the level of 11.6%. And thanks to very strict cost policy, and we will come back to it in the part presented by Jiri Sperl, the cost-to-income ratio has blended at the level of 55.9%. We have continued our role in the Czech economy as a universal bank, we continued financing our clients across the segments and across various industrial sectors. In total, it is represented by a solid growth of 5.1% on a year-over-year comparison. Even though deposits are down by 3.5% year-over-year, we have recorded a very strong rebound of deposit base by more than 6% for the first quarter compared with the last quarter of 2022. So we are climbing back to our usual market shares also on the side of deposits and I am happy to say that Komercni banka is enjoying the trust of its clients as far as the deposits are concerned. Inside the same discipline, we are growing very, very quickly our base on assets under management outside the bank. So in our case, it's mainly solutions of mutual funds made by Amundi or private banking sales or the production of insurance company, Komercni pojistovna and/or Pension Society of KB. Despite this dynamic growth of financing of Czech economy, we are keeping loans to deposit ratio in a very comfortable level of 80.5%. The balance sheet is represented by liquidity coverage ratio over 162%. Total capital ratio of 19.8%. Core Tier 1 is 19.2%. Cost of risk, which is probably also a positive message for the markets went down by 21 bps, are in the negative territory by 20, 21 bps, which is the result of excellent quality our assets. As a result of this, we proposed and Supervisory Board and General Shareholders Meeting approved the proposal of the Board of Directors who are paying a dividend at a level of CZK 60.42 per share. which is keeping us in the corridor of a 65% payout ratio from the results of 2022. We have new Board members or I'd say, one new Board member, Marie Doucet as an Independent Director, and we have reelected Petra Wendelova as a reelected member of the Supervisory Board. Maybe we can move to next page. In the first quarter, and this is what I announced as an important milestone for us was the date of 18th of April when Komercni banka introduced to the market its new platform. When speaking about platform, and we have Margus Simson around the table in case of your questions, we speak about brand new core banking system. The analytical layer above the core banking system plus new mobile banking and Internet banking application, and a new application also for our branches. That's probably from, let's say, technological point of view, the most important message, we have built a technologically a new bank from scratch, and we have been starting migrating clients from old to the new. From clients' perspective, they are getting much more than 24/7 online solution, either into their mobile phones or to their Internet websites or to their favorite branch. So Komercni banka is fulfilling and continuing fulfilling its strategic plan KB-2025. VISA recognized us as the leader in sustainability, and we were second time awarded Sustainable Bank #1 in Czech Republic. What is also good to know is that we concluded an agreement with BNP Paribas/Hello bank! Czech Republic, who is leaving the market for exclusive proposal for their deposit clients to be welcomed in Komercni banka. Here, we expect inflow of thousands or potentially a few tens of thousands of new clients for our retail. Next page, please. When I spoke about implementation of the strategic plan, you see in front of you the main milestones of how we are building the bank from scratch, from minimum viable to minimum marketable retail bank, which will be followed by marketable corporate bank and followed by migration of both retail clients and corporate clients. If I'm not mistaken, now it's time for a short video. [Presentation]

Right, so that was our fascinating video.

We can go on to the discussion of the macroeconomic context for the results once the CEO is back with us.

All right. Great. So I hope you enjoyed this short video. Can we put back the presentation, please?

It is break now, you can comment on the macroeconomic context.

I don't see the presentation on the screen.

I think we can see it.

Yes, I can see it now. Sorry, I had to switch from one computer to the other. So probably we can continue with the macroeconomic environment. First of all, the GDP was growing by 0.1% quarter-over-quarter, was slightly down on a year-over-year basis. What is good is the Czech economy, including the exports or mainly exports were, let's say, continued in their contribution into the growth of the local economy. Labor market remains very tight and what is probably one of the most relevant, I would say, flaws in the economy now a days is the inflation remaining in high double-digit numbers. So in March, it was 15%. We hope and we see that the emphasis for its further growth are probably disappearing. And based on the numbers presented yesterday, the inflation is, let's say, having shorter breadth than before. As a result, Czech Koruna remains very strong, which doesn't help the exports but helps the imports and mainly in energy and oil and gas, we are getting, let's say, more favorable emphasis into the economy as far as inflation is concerned. Czech National Bank keeps the rates at 7% and we will see whether our macroeconomists expectation and outlook about decreasing rates will be fulfilled later in this year. We can move to next page, which is dedicated to financing. So as I have already mentioned, the loans are up by 5.1%, Speaking about the dynamics inside this growth, there is pretty strong and sharp increase of the part of loan book denominated in euro. And we are very much taking care of shielding the clients in front of potential risks stemming from the currency rates. And we are, I'd say, looking at their level of hedging in their complete respective businesses. Housing loans in general. So in our case, it's mortgages and loans originated by the building savings company, are bouncing back slowly, but that are somehow, let's say, growing. I would say, what is more important is that all the categories such as consumer loans, loans for housing and businesses are growing in, let's say, sympathetic single-digit level, which, in our case, being a universal bank is, let's say, a good composition of the engines of our growth. Maybe we can move to the next page, which is dedicated to deposits. So as I have already mentioned, quarter-over-quarter, we are up by almost 7%. Even though on a year-over-year basis, we are down by 3.5%, which is not a new element for you who are following quarterly reports of KB. I need to say that we are very happy with almost 24% growth of assets under management in mutual funds, both Amundi for retail or private banking solutions for our private banking clients. Life insurance reserves are somehow lagging behind the expectations. Nonetheless, Czech people are also coming back for their long-term deposits in the form of pension savings. I will stop myself here and hand over the word to Jiri Sperl, our CFO. Thank you.

Thank you, Jan. Good afternoon, everyone. As mentioned by Jan, we are bringing solid result of CZK 3.5 billion in Q1 this year, slightly up year-on-year. On the other hand, the structure of the growth is more colorful than usual. That's what is exactly shown in the left upper chart. On positive side, I should probably mention mainly excellent cost of risk, year-on-year, it is better by CZK 710 million due to further improved asset quality of the bank, and [ Didier ] will comment on that. On the other hand, these is also relatively a material drop in NII year-on-year by roughly CZK 0.5 billion. Although OpEx is deducting from the bottom line slightly, roughly CZK 340 million, this is our somehow natural, the growth is only in relative terms, 5% in the 15% inflation environment. And I would say that the year-on-year impact of other categories is rather minor. Upper right chart is focusing on the evolution of the bottom line and is only confirming what we are indicating for already 6 months ago. What I mean is that Q2, 3 and 4 last year were kind of extraordinary quarters when we are able to harvest and benefit from all what was possible, in a way we front-loaded the positive impact. And now in Q1 this year, we are getting back somehow to normal. And you can see both on right upper chart and the bottom chart, the clear correction down. I will comment on that in more detail later in my presentation. Anyway, thanks to a very positive result of cost of risk, the profitability indicators stayed at comparable levels like for full year 2022. Let me mention 2 of them and I'm focusing on adjusted for FX 21, so I'll [ linearize ] the impact of resolution. So ROE still at almost 14% level versus 14.4% for full year 2022. ROE 1.3% versus last year 1.4%. so relatively small variations. Let's move to the other slide, which should focus on the balance sheet. In terms of balance sheet, the Group reported a significant growth quarter-over-quarter. It's almost 10%. That is, however, linked to the year-end balance sheet optimization due to resolution. I was mentioning on a year-on-year basis, the growth is rather moderate and it's around 2.3%. On liability side, it is still driven by senior nonpreferred debt or loan, if you wish, taken from Société Générale, it's regulatory obligation, it is MREL-related, last year, we have taken EUR1.5 billion. This year, we need to take another roughly EUR1.4 billion and thus, to be compliant with the regulatory obligation. In Q1, there were no new issuances. On asset side, I would say there are no surprises, neither the funds are based preferential into the loans and the remaining liquidity surplus into Czech [ govies ] growing relatively strongly by more than 14%. The middle of that you can see in repo loans with the Central Bank where we have recorded a decline, minus 12.4%. Let's move to the capital slides. At the end of Q1 and Jan has I think I already mentioned the figure, the capital adequacy stays very strong. It is at 19.8%, i.e., in the upper part of our management buffer. And that's even after all of our dividends approved last year, extraordinary dividend and also by recent General Meeting, but of course, we are accruing dividend, 65% from 2023 profit. That's nicely visualized in the bottom chart. In Q1, the unit costs increased by roughly 30 basis points. And that's basically mainly influenced by the new capital generated adjusted by the expected dividends, as I was mentioning, the impact of risk-weighted assets is in Q1 rather minor. Let me now focus on key accounting categories of the revenues and also costs. So please, next slide. Well, NII, the biggest variation, it went down by 7.4% year-on-year. And the main reason here is clearly on deposit side, declining by 13% year-on-year. As indicated before, last year, we were still benefiting from the different aspects like rising interest rate cycle, delaying of our price income deposit side, and naturally now we do not benefit from that anymore. So the rates and that's distinguished short term are stable already almost 1 year and long term, even already started to decline 5, 10 years. On top of that, currently, we are already fully competitive in terms of pricing of deposit, if I'm saying fully competitive. I'm not saying we are the best benchmarking to the Tier 1 banks because small banks are offering even more, which on one hand side, stopped the trend of declining deposits. but at the same time, increased our cost of funds, and this is, of course, impacting this category as well. What is not helping neither is a continuing shift of current accounts to pay deposits. Jan was mentioning, pay deposits I mean basically time deposits and savings accounts. There is also a slight decline of the net interest income coming from the loans, which is the blue part, it is minus 3% year-on-year, which is clearly a spread effect. on year-on-year basis, and I'm talking now about the back book, the spreads are down basically echoes the board with one exception, which is large corporate, where we are still able to maintain this margin. Of course, all in all, this led to, now I'm referring to left upper chart, a year-on-year decline of NIM, net interest margin by 21 basis points from 222 to 201, i.e., slightly more than expected, and I will comment on the implication during the outlook. On the next slide, there should be fees and commissions, so they are growing moderately by 1.4% year-on-year with the transaction activities trending up. It's mainly card payments case, which is growing year-on-year by 8%. There is a correction in the fees from [ cross-sell ]. It's minus 3% mainly due to lower year-on-year contribution from mutual and pension funds. And there are also a bit lower fees from the specialized financial services and here mainly due to the lower contribution from debt capital market services. which is bringing me to financial operations. So next slide, please. Here, the net profit is down year-on-year by 7.5%. But we still treat it as a super strong result. It's necessary to mention here that Q1 last year was a kind of historical record as can be seen from the bottom chart. So we are only slightly below this record and the bank is fully satisfied with this result. The year-on-year correction side, correction is visible solely in the capital market gain, so does the right part of the chart. But again, it's rather base effect versus the record for Q1 last year. The good result is supported mainly by solid demand from SME clients for tailored hedging strategies. And it's particularly those based on FX options. The FX income from the structural book, so that's the blue one, is reflecting seasonality of the [ travel inc ], and we definitely expect that in Q1 and beyond, we'll get back to the levels around CZK 550 million on, let's say, year-over-year basis, it's basically flattish. I think next slide is OpEx. So please, yes. Costs are traditionally under control, growing only by 5% in a very high inflation environment. The personnel costs are plus 4%, mainly as a result of increase of salaries as of October last year, we were informing you during the full year result presentation. Guidance is growing relatively significantly by 23% year-on-year, and it is mainly linked to our transformation and mainly the cost of double of 2 IT systems. And of course, we also need to enter, we will need to invest a bit more to the marketing for the launch of NDB. Regarding the regulatory costs, we booked and the pink car, we booked lower contribution, to Resolution Fund, as already indicated in Q4 results. Just to remind, at the time, Resolution Authority announced that the whole sector contribution would decrease in 2023. That's true the invoice haven't come yet, will come beginning of June, but we believe that this is going to be confirmed. Here also to mention and to focus on a very recent and slightly negative piece of news at the beginning of this week, CNB announced a bit higher surcharge for deposit [indiscernible] due to Sberbank, simply the fund is not technically at the requested level of net proceeds from the sale of Sberbank haven't come yet and will come soon in Q3. So economical wise, it doesn't make any sense, but it seems that the banking core doesn't allow to take into account the future cash in. So the increased cost for KB is a CZK 45 million. And the last point to the OpEx. Depreciation is growing by 8% year-on-year, mainly reflecting the depreciation of already activated components of our new digital bank. And that's for now all from me, and I'm passing over to Didier.

Thank you, Jiri. Good morning. Good afternoon, ladies and gentlemen. So going into the credit risk section. I will start with the 2 main takeaways for this section. The first one is the continued low default intensity across all segments and products with a moderate exception concerning our consumer lending portfolios. And the second key message is the continued strong and, in fact, better-than-expected recoveries which we achieved on our NPL corporate exposure, which is the main driver behind this Q1 provision net reversal and positive impact. Now going into a bit more detail regarding the asset quality. As you can see on this slide, we recorded a residual increase of our S2 exposure by roughly CZK 3 billion. What is worth mentioning again as it was in the recent quarters is the low level of dynamic of migration between the S1 and the S2 categories. In fact, these 2 reverse flows are balanced in terms of their intensity and the materiality is below CZK 15 billion, which compares to near CZK 800 [ billion ] in total for those S1 and S2 exposure. The S2 ratio was, as a result, stable at 13%. And as previously mentioned, in fact, our provision coverage ratio for non-defaulted exposure in the last 3, 4 years. So just before the entry into the COVID period until the end of the first quarter 2023. We doubled this provision coverage ratio from 0.3% to 0.6%. The default inflow, as I just said, in the first quarter continued to be very limited, more specifically. We continue to observe a very good level of resilience for the mortgage on exposure, as well as, which is a little bit more surprising for the small business client segment exposure. This default rate being slightly below the pre-COVID levels. We recorded a bit of volatility for the corporate segment, but the absolute levels of default rate also being at the pre-COVID levels. And we recorded a bit of increasing trend for our consumer lending exposure. In fact, this increasing trend is quite in terms of its risk drivers well identified. And so it was quite easy for us to perform the needed adjustments. As a result of all of this, you see that the defaulted exposure marginally decreased in fact, Q-on-Q by a bit less than CZK 1 billion and the NPL ratio reduced also a little bit from 2.3% to 2.2% as a result of which our S3 provision coverage ratio remained stable in the range of plus/minus 50%. Now going to the next slide, which gives you the cost of risk overview. So this material level of natural leases above CZK 500 million, slightly below overall CZK 5 million at CZK 432 million. In fact, it's coming mainly from the corporate segment, where on the side of the defaulted exposure, we recorded, as I just mentioned, recoveries, net recoveries in the range of slightly above CZK 0.5 billion. While for the performing corporate exposure, our cost of risk net down to 0, which is in the current context, quite a good result. We had a bit of rating deterioration in magnitude that was very isolated without any cost of risk effect, this small deterioration, in fact being absorbed by the consumption of our corporate inflation over reserve that we booked back in 2022. If we look now at the retail portfolios, we had a residual level of net creations, net provision creations slightly below CZK 100 million. And its majority came from our consumer lending portfolio. Again, we've clearly identified risk drivers, which put us in a position to take the necessary actions. The other portfolios continue to show a very good level of resilience, and this is particularly true for the mortgage loan exposure. One small note, we decided, in fact, not to activate the consumption of our inflation overlay for retail exposures, this being justified by a voluntarily prudent approach in the context of high inflation. And these inflation reserves for the retail portfolios being quite precisely calibrated for portfolios showing a high risk profile. So we prefer to stay on the present side, and we [Technical difficulty]. The guidance for 2023 full year, we've decided to revise it a bit down from the previous level, which was in the range from 20 to 25 basis points being revised down to 15 basis points, and there are basically 2 factors behind this downward adjustment. The first one is the reduced default intensity compared to the assumption that we had taken previously. And in fact, this default intensity across all products and segments now is forecasted at a level which are slightly below 2022 levels. And the second factor behind this adjustment, favorable adjustment in our cost of risk guidance is coming from the improved recovery potential on the side of our defaulted corporate exposures. And on those words, I will hand over now to Jiri, who will continue to guide you through the 2023 outlook section. Thank you. Jiri, the floor is yours.

Thanks Didier. Yes. Well, compared to 3 months ago, we are broadly confirming 2023 macro assumptions. So that's true that there will be slightly better GDP at the same time, slightly higher inflation. And it is also the case for the banking market outlook, meaning that both loans and deposits are expected to grow mid-single digit. In terms of KB business and KB Financial outlook, we are going to adjust slightly the guidance not in loans, loans stay around. We are sticking to the previous mid-single-digit growth guidance. even slightly higher than the market, so gaining market share. By the way, it's also the case of Q1. This year, when we gained the market share slightly in loans area. And even more importantly, it was the case both for retail and CIB. Not significant but the direction is there. In deposits, after a weaker Q1 than expected, we do not expect to gain market share as originally guided. And we will probably go the similar pace as the market. And this, of course, together with the faster switching from unpaid current accounts to repay the deposits than expected will lead to the slight decline of the revenues influenced mainly by higher drop on NII front. While we are confirming fees and commissions still mid-single digit and the same quite, let's say, quite meaningful growth of the income from the financial operations. For reference, the change in the guidance for NBI is the following 3 months ago, you were guiding flattish [ NBI ] now we are talking about a slight decline. There are no changes in OpEx i.e. upper mid-single digits and cost of risk being likely better as Didier mentioned. Risks to the outlook are listed at the very bottom of this slide, and basically, they remain the same. So it means a further escalation of war, worsening of the external economic environment et cetera et cetera. We added one risk of kind of the impact of the stability package by the government and this risk, or this materialized yesterday, to say now not impacting 2023, but rather years beyond. Maybe I think it is first to save, what has happened yesterday? So government yesterday presented measures to stabilize the public finances from 2024. We are still analyzing the impact, but already now it is clear and ESCO subject to be approval by parliament, et cetera, et cetera. Still a lot of things could happen. But there are 2 simulated impact, the biggest one is, of course, on corporate taxation as it was approved or announced yesterday that the corporate income tax is going to grow from 19% to 21%. So to just to give you a flavor of the impact on KB would be expected, the first estimate is expected at a level of increased tax cost by roughly CZK 400 million, annually. And the other material impact is going to the taxation of the employee benefits. And here, I'm talking about the abolishment of exemption of certain benefits. And so it is related to cafeteria part of [Technical Difficulty] OpEx, mainly in personnel costs and the simulation is suggesting now that starting from next year, it would increase OpEx by roughly CZK 90 million annually. So that's in a summary, the outlook and including the most recent information and now I am happy to refer on the word to [ studio ].

Thank you very much, Jiri. So ladies and gentlemen, this has concluded the presentation part of this meeting. We will now be happy to answer your questions. [Operator Instructions] But we remind you that this call is being recorded. [Operator Instructions] we have a first question from the line of Olga which, I guess, might be Olga Veselova from Bank of America, if I'm not mistaken.

This is Olga Veselova from Bank of America, and thank you, Komercni team for the comprehensive presentation, and very detailed outlook for the full year. I have several questions. One is, what was driving the deposit inflow in the first quarter and why do you need to keep competing for deposits by pricing if deposits growth is so much faster than the loan growth? So this is my first question. The second question, remind us your estimate of windfall tax for this year and when is this actually paid during the year? And third question is, your short-term outlook on net interest margin for the next quarters, I appreciate you gave us NII outlook for the full year, but if we can think about margin in a little bit shorter terms, what trends do you expect there?

Okay. So, I will start from maybe, yes, deposit inflow in Q1 for this year, well, I think it is very much related to the strengthening of the balance sheet at the end of the year. So, at the end of the year, it's kind of a seasonal drop, and the drop was in Q4 of last year, a really significant, so we are getting back to normal. From my perspective, it would make more sense to compare to the Q3 balances. And if you compare to Q3, we are slightly below. So, we are not fighting for the deposits. We are in the middle of the pack, so if I'm talking here about Tier 1 banks, that's true, that small banks are offering more, but we don't want to fight with them. So, that's first question. The other was related to the windfall tax, right. So, we are sticking to our guidance we were giving you during the Q4 results presentation, meaning that the impact in 2023 it will be very limited. It is a matter of our policy not to guide, let's say, if taxes really are stopping at GGOI plus the cost of risk of course, but we don't comment on taxes. In terms of the payment, you're right, we are going to pay some kind of an advance payment for 2023, and this payment is going to be based or is based on the results of 2022. We already publicly announced that we are expecting to pay roughly CZK 1.8 billion, but at the same time, there will be kind of settlement in mid of 2024 and we are expecting that a huge majority will be repaid back. And the last question was related to NII or NIM generally, well, we are guiding high-single-digit drop, maybe it's worth to stay on this topic a couple of minutes. Well, the main reason of this drop are several boats. First one, in Q4 last year, still we didn't complete the appraise of the deposits. Some of you remember that in first, let's say, 9 months, we delayed our response to the increased market rates. So, we started in Q4, but still this pricing hasn't been completed. Now, it is the case, and of course this is relevant for the whole year. So, having said this, simply cost of funds are going to be much higher. This is one thing. Other thing, deposit competition is more severe than we expected. Third reason I should mention is that we are missing kind of positive impulses of the growing interest rates. Fourth point to mention is, and we were commenting on that during the presentation, is that, the unpaid versus paid deposit ratio is deteriorating, and it is deteriorating faster than we were expecting. Fifth, so I think fifth reason is rather a bit technical, but it's our contribution of 5, being the buffer, It has been somehow transposed into rather FX operations in income from the finance operations. And probably the last point to mention and I was I think touching during the previous earnings call that we have a bit setting us into the position that is for decrease of the market interest rates. What I mean is that we slightly increased long-term receive fixed interest rates and thus locking the income, so net interest income at a still relatively high interest rates, but ESCO has given the increase in our shape of the yield curve. This is partially touching our immediate recent net interest income. So, that's basically 5, 6 reasons I actually wanted to mention, transpose into net interest margin, I think we were guiding 3 months ago a drop by a 25 to 30 basis points, so have taken into account all the points I was mentioning, before taking into account the results of Q1, where we are a bit deteriorating this guidance from 25 to 30, to 30 to 35. So on average, by 5 basis points.

That's very comprehensive. Can I just clarify one thing? Raising of senior non-preferred debt from Société Générale, is it neutral for your net interest margin?

That of course, it is kind of a semi capital instrument. So, the margins here are much higher than that are on the senior debt. On the other hand, as you might remember, we are running under the SPE approach, meaning all these instruments has to be intra-group transactions and to say, here we are significantly benefiting from that fact, because if we would have to go to the market ourselves, the spreads and margins would be much, much, much higher. So, this is currently our big competitive advantage compared to other Czech banks who are for example running on the MPE, multiple point of entry.

[Operator Instructions] And I can see question from Kamil Stolarski from Santander.

I wonder what is your current sensitivity to potential rate cuts in Czech, and can you elaborate a little bit more on, because I understood that you have increased the hedging during the first quarter and how material is that? And my second question would be about the cost of transformation. And I wonder, is there any impact on the cost reported in profit and loss statement related to the new project, and how much is it? Or is everything like capitalized and there is no impact in the P&L as of now?

Well, that's probably again to me. So, first one was to sensitivity. Currently, our sensitivity is, and we are usually showing the parallel shift of the yield curve by 100 basis points impacted in upcoming 12 months. So, probably you remember that 12, 15, 18 months, we are fluctuating at the level of above CZK 1 billion. So, that's what I was referring to at the beginning of my presentation. We benefited from that, because the rates really went significantly up. Currently, the sensitivity the same parameter or indicator is fluctuating at level zero. So, we don't go beyond zero, because we don't take strategic positions. But we are, I would say, well set-up for the expected decrease of the market interest rates, sooner or later. In terms of cost of transformation, well, I can just confirm that what we said, I don't know, roughly 2, 2.5 years ago when we were announcing the expected costs. So, the overall cost should fluctuate at a level of CZK 7.7 billion. But at the same time, what we said at that time, and this is still valid, 70% out of that, we are absorbing and are going to absorb via let's say limiting of the investments into the old world. Maybe worth to mention that if I'm saying CZK 7.7 billion, it's in 2019 prices, so please adjust that by inflation since that time. Yes. That was second question. Was there still the third one?

Our next question comes from Simon Nellis of Citi.

Maybe you Jiri, you could elaborate a bit on trading and other income, because I think you're saying that revenues will be slightly down, you're quite pessimistic on net interest income fees growing I guess mid-single-digit. So, I guess it suggests that you think the very strong financial income can be sustained, can you walk us through what the risks are around that or the upside?

Sorry, thanks. Yes, that's about what I can confirm and the first quarter so basically confirm that as well, the income at the level of CZK 1 billion, basically we are expecting that the upcoming quarters and could be even a bit better off, we will see, but so far we are running in line with the plan and you know it's a 2 parts. So, first, we are going to increase the FX income from structural book as I was indicating during the speech. So, this is one driver. Q1 was rather seasonally lower and in terms of gearing income or capital markets income, we still count on the demand of hedging by our clients, and also the volatility should improve. So, that definitely here we are expecting, let's say, double-digit first growth, I would say significant double-digit growth.

And then, just on the mechanics of the windfall profit tax, the prepayments, that will hit in the second quarter or so should we expect kind of a one-off hit to tax in the second quarter and then some kind of write-back next year, assuming no changes in your mechanism?

You are talking probably about advance payment.

That's right, yes.

We are obliged to pay is during the Q3, I don't remember exact amount, but it will be paid during Q3 this year. And the same during and roughly in mid of next year, it should be settled then. So, we are talking about 9 to 12 months of value of money if this is behind the question, 9 to 12 months.

Our next question comes from Máté Nemes of UBS.

Thank you for the presentation. I had a couple of questions still on NII. I think, Jiri, you mentioned that you've seen lending spreads stabilizing quarter-on-quarter. I'm just wondering, could you talk a little bit about how you expect those spreads to evolve from here in Q2 and the next couple of quarters? And the second question is, just taking your NII guidance of high single-digit decline year-on-year for a full year, that suggests around 3% higher run rate for the remaining quarters this year, if I'm not mistaken, and that would suggest fairly minimal net interest margin decline from here onwards, taking into account the good mid-single digit growth in loan terms. Can you confirm if that is the case? And then perhaps give a little bit more color on how Q2 and the remaining quarters could look like in that context. And maybe a last one on new mortgage production. I think there was a little bit of a pickup in Q1 versus Q4, is that something that you see continuing in the second quarter as well or that's not really indicative quite yet as long as interest rates are still at the elevated level?